RPI changes will bring 'music to the ears' of scheme sponsors

Written by Adam Cadle

26/09/2012

Proposed changes to the way the RPI inflation index is calculated will bring “music to the ears” of sponsors of defined benefit pension schemes with RPI-linked benefits according to BROADSTONE actuarial director John Broome Saunders.

The proposed change, which will aim to lower RPI and which could also remove a perceived unfairness in the way inflationary increases are calculated, could on average reduce RPI by up to 0.9 per cent.

Speaking about the sponsors of defined benefit pension schemes, he said that “many will have felt diddled when, two years ago, the government announced that statutory inflation-linked benefits would, in the future, be linked to the lower CPI index. This dramatically reduced liabilities of schemes with increases linked to these statutory requirements, but had no impact on the liabilities of schemes with an explicit RPI link. If RPI is changed, sponsors of schemes with an explicit RPI link can expect to enjoy a similar reduction in liabilities."

Addressing inflationary increases Broome Saunders commented: “Before the government’s announcement in 2010, most schemes had no idea whether their pension increases were linked to a specific index or not. Any move to a more consistent measure of inflation will help eliminate the ludicrous situation where inflation-linked increases can vary significantly, depending on which index a scheme happens to use.”